With a closing price of $462.54 per share, it’s a great time to re-evaluate Apple’s long-term prospects. To no surprise, it seems that the fundamental drivers of the company are still intact, despite the tumultuous decline of the stock over the last several months.
As the stock trades at improved, but still low levels, the disconnect between the value of Apple’s business and the stock price has grown wider. I can’t say it any more bluntly: Apple is undervalued. I’ll give you three straightforward reasons why Apple is a great long-term investment at $462.54 per share.
China Mobile : Many analysts believe that China’s largest carrier will finally get the iPhone sometime in 2013. In fact, it was recently disclosed that Tim Cook is in China this week, and will likely meet with executives from China Mobile in the coming days to talk about bringing the iPhone to the world’s largest mobile carrier. China Mobile’s 740 million customers (Over twice the population of the United States) is a goldmine, and many analysts agree that tapping into China Mobile would give a large lift to Apple’s stock. But Apple would not be the only one to benefit from the deal.
To accommodate for the prospective iPhone deal, China mobile will have to increase its 3G internet capabilities. Only 19% of the 740 million customers, 140 million, were 3G subscribers due to poor infrastructure China Mobile has around the country.
However, the company just launched a tender for suppliers to build its 4G TD-LTE network in China, including the provision of equipment for 207,000 base stations in 31 provinces; more than half of the company’s network expenditure will go towards 4G in 2013. With less than 80% of subscribers even having access to a 3G network, China Mobile has tremendous upside to increase revenues and income based on the growing number of smartphone users and the higher revenues they generate. The spending on LTE stations alone with serve as a catalyst for a deal with Apple, and propel both companies higher as well.
Retail presence: No other tech company has a retail presence like Apple’s. Its brand show-casing retail locations give Apple a way to connect with customers in a way competitors can’t. At an average of 8,400 square feet per store, Apple retail stores are the most successful retail stores in the world when measured by sales per square foot.
Lucrative opportunities: With over $100 billion in cash & cash equivalents and, according to Forbes, the world’s most powerful brand, there are plenty of ways Apple can use its money to create more shareholder value. This type of leverage is simply an impossibility to virtually every company and a significant competitive advantage Apple has.
Measured by a straight-forward valuation metric, free cash flow (FCF) yield, Apple is available at a great price. FCF yield shows you what percentage of a company’s share price is represented by the cold, hard cash it’s churning out. The higher this percentage, the better. Let’s compare Apple with some other wide-moat, blue-chip stocks: Google (NASDAQ: GOOG), Wal-Mart, McDonald’s, and Procter & Gamble.
Apple trades at a more conservative valuation, measured by free cash flow yield, than all four of these other, fundamentally solid, companies. Google, arguably the largest competitor of Apple from a physical phone perspective, operates head-to-head with Apple with its Android platforms. As a matter of fact, Google is becoming more like Apple, especially as it branches outside of its key advertising model into other areas, and rumors of Google-branded retail stores have started to circle. If you look at the Google vs. Apple debate from purely the stock price, shares of Google are up 20% over the past three months, whereas Apple’s is down 19%. With that said, it’s very hard to argue that Apple is not the better investment right now, especially with its valuation.
Perhaps the most shocking statistic of all is that Android has 72.2% of the Chinese market, compared to Apple’s 19.2%. Additionally, Android accounts for nearly 300 million Chinese subscribers, compared to Apple’s 100 million. While this numbers seems an impossibility for Apple to reach, if the rumored low-budget iPhone is released, and a deal with China Mobile is met, Apple’s numbers could shoot up.
Warren Buffett once said that “The single most important decision in evaluating a business is pricing power.” Apple’s gross margins are the envy of the industry, at 38.27%, ranking it in the top 20% of the industry. Couple that with the above free cash flow analysis, and we’re talking about a very solid company.
With any security, it’s anyone’s best guess as to what will happen in the short-term. But in the long-term, fundamentals and the opportunities, like the aforementioned, are what create and sustain long-term growth, and Apple is the quintessential example of that. Despite all the criticism toward Apple executives and the stock’s poor performance over the last year, the three above-mentioned points are reasons why investors should shouldn’t count Apple out.